Here’s the concept that I am wrestling at this point in my life.  Zero-sum competition and outcomes.

As you know, I am compelled on a regular basis to work towards explaining why we are in a recession so that you, my readers, may benefit and parachute before this economic plane crashes.

So, why are we at this point?  What is a recession?

A recession by definition is a subjective amount of time in which a country’s total output (GDP) decreases.  And this is how President George W. makes his case that we are not (technically) in a recession, because we have experienced minute growth.  Only one problem with that reconciliation - you remember when GW claimed during the 2000 election cycle that Al Gore was guilty of ‘fuzzy math’? - well, our ‘growth’ is based on some fuzzy math.  Namely, it’s built on smoke and mirrors - federal interest rate juggling, hefty war expenses and some highly inflated oil revenues among many others.

It works like this: our economy shrinks say $19B this year because we are all producing less due to overseas outsourcing, increased debt loads, the housing and mortgage crisis, gasoline hikes, etc, etc.  And we all feel that pain.  However, approve a $19.1B Iraq War bill (government expenditures are included in GDP) and suddenly our economy ‘grew’ $0.1B.  Welcome to fuzzy macro-economic math.

It’s like when my wife returns from shopping and before the presentation of her efforts, begins by telling me she saved 10%.  What, am I stupid?  I know what that means.  It means that she had a 10% coupon, so she bought 30% more!  Fuzzy math.

As to why we are at this point, well that involves game theory and what we call a zero-sum game.  A zero sum game is a competition in which one individual does better (gains) at another’s expense.

Think:

• Tug of war - one person/team’s gain can only come at the expense of the other person/team’s loss
• Chess/Checkers/Risk - a person only gains by taking away resources from and advancing on the competition
• Poker - a person only wins at the expense of other players at the table.

But how did we get to zero-sum gaming/economics?

Picture yourself in an early civilization (or a least picture yourself as Charles Ingles in Little House on the Prairie) - people then gained by cooperative ‘games’.  In those days, if you wanted shelter, you put your hands to work and made shelter.  If you wanted food, you plowed, planted, harvested, stored and cooked it all.  Our early ancestors were jacks of all trades.  But something happened.  There was a person who made shoes really well who barely had time to fix his fence - he just happened to know a guy who built great fences, but even if he did have time, made lousy shoes and had sore feet.  Voila.  Social economics (trade) was born.  And because each became specialized in their jobs, they could produce more at lower costs because of efficiencies.  Both shoes and fences were made better than ever and everyone gained in this equation - cooperative gaming.

Then again, something happened - critical mass.  Zero-sum games entered the equation because at some point, both the shoe maker and the fence maker had built up successful businesses which had the accompanying overhead (recurring) costs.  Alas, they had to start selling shoes and fences to people who didn’t necessarily need them, so at this point they’re gaining at somebody’s else’s expense.  To bring it home - how many pairs of shoes do you have?  Now, how many pairs do you need?  (NEED?)  Somebody somewhere convinced you that you ‘needed’ more than 1 pair.  Shoemakers gain more from the sales of 10 extra pairs of shoes than you do from having 10 extra pairs of shoes.  So zero-sum seems to equate to excess, don’t you think?

Another example - think insurance.  Ben Franklin engineered the first organized fire department, then quickly followed by creating the first fire insurance company.  Good intentions or capitalism?  Both.  Insurance at it’s root is socialism - socialism has the intention of being cooperative (everyone can benefit), but ends up a zero-sum (gain comes from others expense).  Face it, the people who need insurance are typically high-risks, while those low-risk users keep the system alive.  And before you know it, insurance companies are denying worthy claims and dropping low-risk customers who are finally caught by the odds.  Why?  Somebody has to lose for others to gain in a zero-sum game.  In the insurance game, low risk users are there to pay, not use.

And see, our economy right now is based on a zero-sum game.  It’s propped up on debt.  So the ‘gains’ that we are experiencing, the mideast oil that we are fighting for and protecting, the windfall pharmaceutical and oil profits are all coming at our own expense.  We are cannibalists - we are eating ourselves out of our future security, out of stress-lite lives and out of our own homes.

So what have you eaten today?  Check your debt against your assets (income, savings, investments) - the answer may just be…yourself.

Bon appetite!